What’s good for U.S.-China-Japan hurts emerging markets

What’s good for the global economy’s superpowers risks creating losers in other parts of the world.

Signs that the Federal Reserve is preparing to curtail its stimulus are boosting interest rates abroad as well as in the U.S. The strictest credit squeeze in China in at least a decade threatens to erode a pillar of international growth. Japan’s reflation push is lifting the exchange rates of trade rivals and luring capital.

While the transitions could mean slower growth in the U.S. and China, they ultimately prime the three biggest economies for less volatile and longer-lasting expansions. Losers for now include the emerging markets and commodity producers previously buoyed by easy U.S. monetary policy and Chinese demand. Economies that still need cheap cash or weaker currencies, including the euro area, also could suffer. Policy makers already are responding.

“Pieces of the world are moving, and when that happens you have frictions,” said Stephen Jen, co-founder of hedge fund SLJ Macro Partners LLP in London. “There’s more divergence, and financial markets will see more volatility.”

Lowered Forecast

The shifts are reflected in today’s new International Monetary Fund forecasts, which show the gap between developed- and emerging-market growth rates will remain close to the narrowest in a decade, at 3.8 percentage points in 2013. Further undermining the trend set in the wake of the 2008 global financial crisis, the Washington-based lender cited a slowdown for emerging markets in cutting its prediction for worldwide expansion this year to 3.1% from 3.3% in April.

The new environment is leaving some emerging countries -- especially Brazil, Mexico, South Africa, Turkey and Ukraine -- vulnerable to a sudden stop in which capital flows are thrown into reverse, say economists at Morgan Stanley, who used 12 metrics including debt issuance and current accounts to measure the risk.

For all the shake-up, international policy makers have long sought such changes because of concerns about easy U.S. money, China’s outsized demand and Japan’s malaise. Group of 20 finance ministers and central bankers will assess the outlook when they gather next week for talks in Moscow.